Optimize A/R reconciliation with these 4 strategies
Many business owners are pretty excited about creating products and sharing them with prospects, knocking their customers’ socks off with excellent service, and eventually expanding into new markets. The last thing on their mind is likely the most arduous part: managing collections through accounts receivable.
And it isn’t specific to new businesses, either - managing accounts receivable is a global issue. According to the Payment Practices Barometer released by Atradius, U.S. companies wrote off 1.5% in uncollected receivables in 2016, and received late payments for 47% of sales on credit.
If your business invoices $500,000 per year, that 1.5% of receivable writeoffs translates to $7,500 per year - gone. And almost $250,000 of your $500,000 in receivables paid late? At that rate, you’re likely to have some serious cash flow problems.
Poor management of accounts receivable causes loss of revenue and potential liquidity issues. So how can you ensure your business is on the right track? Start by examining your existing processes, especially as it relates to accounts receivable (A/R) reconciliation.
A/R reconciliation is the process of verifying individual payments against the total amount invoiced for a given time period. Going through this process on a regular basis can help you identify missed payments, so you can proactively follow-up with customers - rather than waiting until it’s too late to collect. Here are a few strategies that will put you on the path to success:
Configure all your inputs upfront.
In order to make things faster and easier in the long run, you need to know all your critical inputs and configure them as part of your accounts receivable processes. These are things like customer records, payment terms, and product and service entries.
Customer records should have a series of required fields, including name, address, telephone number, and email address, so you can easily contact customers with invoices. Preferred methods of payment are also helpful if you accept multiple forms of payment. Payment terms customers have agreed to are another requirement. Recorded payment terms can be easily applied to invoices so you can refer back to them during A/R reconciliation.
Creating product and service entries in a catalog will allow you to select from a list for each invoice, rather than manually entering products and services each time. That way, your customer and invoice data adhere to a set of standards you created and can easily reference.
Automate the follow-up process.
One of the key challenges of accounts receivable is the follow-up process for past due invoices. In order to cut down on repeated phone calls and emails (which take a ton of time and don’t always happen), set up a process that does the work for you. Invoicing platforms offer automated programs called invoice chasing that do just that.
You decide the frequency of email messages, when to start sending them, and what the text is, and the invoicing platform sends reminders automatically.
Automated invoice chasing can drastically speed up payments, without all the effort associated with manual follow-ups. We’ve polled our customer base, and those that turn on automated invoice chasing get paid an average of 8 days faster!
Incent customers to help with your efforts.
You’re probably focused on how you can best help your customers. Have you ever thought about how they can help you?
Think about your current billing landscape. What are the most common problems? You might be able to come up with a process that solves the issue by enlisting your customer’s help.
Do you get lots of customer calls and emails about invoices? Consider offering a customer portal, where customers can log in and view all invoices, make payments, request credits, and gather historical invoice data.
Are you struggling with manually entering a mountain of checks into your invoicing system each month? Offer your customers a way to pay online with an incentive - maybe a coupon for the first 3 months of online payments, or a free add-on or upgrade.
Do you regularly have late payments from a subset of customers? Target those specific customers with payment plans to see if you can drive on-time payments on a different schedule.
There are tons of scenarios here - these are just a few examples. Take the time to make a list of these issues, and brainstorm some ideas to resolve them.
Use high-level reporting to easily identify exceptions.
Now that you’ve laid the groundwork, it’s time to reconcile accounts receivable. Establish a cadence of at least once a month to stay on top of late payments. And with all these processes in place, the time you have to invest in reconciliation should be much lower.
Many invoicing and account platforms will have an A/R reconciliation report to avoid the eye-crossing work of manual matching. For a specific date range, you can view your total amount invoiced against the amounts paid. Those stragglers are where you should focus your attention.
And if it’s more than a few lagging behind in payments, consider looking at them as a group. Is there a common issue? If so, is it something you can address with a new billing solution?
High-level reports like an A/R reconciliation report will help you manage exceptions, rather than just manually addressing each customer’s individual billing needs.
Do your homework to streamline A/R reconciliation.
All of these recommendations might seem like a lot of work - and they are. But most of that work happens at the beginning. Taking the time think about your accounts receivable strategy early on will help optimize your efforts. Otherwise you’re just putting a bandaid on every time a new issue comes up.
Interested in how Invoiced can support a proactive accounts receivable operation? Schedule a demo to learn more.